Most administrations are a bit reluctant to pass regulations that anger prominent members of their own party, but President Obama apparently has no qualms doing so. Last week the administration announced the final version of a regulation that will require depository institutions to report interest paid to nonresident aliens despite protestations from the entire Florida delegation (including DNC chair Debbie Wasserman Schultz) and a wide array of Democrats and Republicans across the country. The harmful consequences to our economy promise to be significant.
The major problem (as we pointed out earlier in these pages) is that there is roughly $3 trillion in deposits in U.S. banks from nonresident aliens, most of which is here because the depositors live in countries where the political and economic environment conspire to make domestic bank deposits less than safe. Rampant inflation, a sudden devaluation, or an arbitrary tax on wealth are constant threats to the middle class throughout the world. Those who wish to guard against this often do so by opening a bank account in the United States, where such things haven’t happened for a while.
The concern that Wasserman Schultz and the rest of the Florida delegation has is that the reporting of interest is going to cause these foreign depositors to take their money and put it somewhere else, which would cost our economy dearly. For starters, those cities with a nexus abroad (such as Miami) have several banks where the majority of deposits come from nonresident aliens. It’s almost a certainty that a few of these banks are going to fail, and those that survive are going to lose capital. Fifty-seven banks have already failed in Florida in the last four years in what was ground zero for the housing bubble, and this will only add to that number.
A study by George Mason economist Jay Cochran estimated that a more restrictive version of this rule applying to only 15 countries would cause roughly $100 billion to leave this country. Using his research would suggest that the current rule will result in three or four times that much money going elsewhere. To put it in perspective, the impact of another repatriation tax holiday—a bipartisan effort hailed by its supporters as a sure-fire economic stimulus—would bring back to the United States about the same amount of money as the nonresident alien reporting rule would cause us to lose.
A few hundred billion dollars of deposits is nothing to sneeze at: our fractional banking system typically allows for one dollar in deposits to support seven to nine dollars in lending. In other words, a withdrawal of $200 to $300 billion in deposits would eliminate $1.5 to $2 trillion in lending capacity.
The American Bankers Association noted that new reporting requirements will in no way benefit taxpayers or consumers. The interest reported isn’t taxed and the new reports will be sent to foreign governments, good governments and bad ones.
The Credit Union National Association noted that there are more than 3,500 credit unions with five or fewer employees, most of which are ill-equipped to handle nonresident alien reporting forms. In the final rule, the administration ignored this reality and stuck with a 2004 analysis of the rule’s burden, which included only 15 countries and was laughably low even for that cohort of countries, let alone the additional 185 or so added to this version of the regulation.
With all of this political and industry opposition, one might expect huge benefits from the regulation. However, the purported benefits stated in the final rule are “reciprocity” and “voluntary compliance by U.S. taxpayers.” In the end, this regulatory ploy appears to be another attempt to ultimately extract a few dollars from the wealthy, but at an enormous cost to the economy.
But this president has already indicated that redistribution takes precedence over economic growth.
Sam Batkins is director of regulatory policy and Ike Brannon is director of economic policy at the American Action Forum.